How Bankruptcy Helps Seniors Protect Assets

seniorMany seniors in Illinois continue to struggle since the downturn in the economy that began over 10 years ago.  Take Millie for instance: a 67-year-old who took early retirement a few years back when it was offered by her employer, due to health concerns.   A few years into retirement, with a substantially lower income, and healthcare costs rising, soon her debt-load mounted and the creditors began calling.  When her husband died, and with the loss of his income as well, Millie soon saw that the hole she was digging was only getting deeper, with no possibility of it ending.   She wanted some financial peace back in her life, instead of having to constantly live with the stress of phone calls and collection letters.  So she decided to call our office and file a Chapter 7 bankruptcy, a liquidation case in which assets are, on rare occasions, liquidated to repay creditors.  (For an explanation of what personal property a Debtor is allowed to keep if they file a bankruptcy in Illinois, please see our article here).

As our office often informs our clients, bankruptcy is the ultimate trump-card.  Once a bankruptcy petition is filed, creditors can no longer contact the client by phone or mail, and they cannot file or continue lawsuits that have been filed, or continue any wage or bank garnishments.  (The only main exception to this is with regard to enforcement of alimony and/or child support obligations.)  Therefore, the initial filing itself provides a level of peace and stability for clients to be able to get back on their feet, and begin to rebuild again.  For seniors especially, this can ease a lot of concerns, as instead of merely worrying that their children will inherit only debt,  they can actually be able to begin saving again and enjoying their golden years.

Especially for the older generation, bankruptcy can bring much-needed relief from debt brought on by medical expenses or helping out their children in need.  However, what is unfortunate is that the moral and emotional stigma of a bankruptcy often prevents retirees from getting help right away.   Clients often postpone bankruptcy for several years before filing as the shame of being financially strapped, and their own moral compass, frequently delay their visit into the office.  Getting over the stigma of bankruptcy is often the hardest part of the bankruptcy process for these clients.

However, waiting until the last minute to file is usually the opposite of what retirees should actually do.  If their situation is not likely to improve, and it is not merely temporary, then retirees should be more proactive in seeking assistance and file a bankruptcy right away, instead of waiting until they run out of options.   By spending retirement assets in an attempt to try to pay off debts, retirees risk a downward financial spiral from which they are far less likely to recover than younger generations.   A much better strategy is to defend and keep assets out of the hands of creditors, in order to provide retirees more options as they age.

Federal bankruptcy laws protect retirement accounts, and both income and retirement savings are usually untouchable by creditors, and are a protected asset in a bankruptcy filing.  Social security benefits, pension plans, IRA’s, 401(k) and 403(b) plans, as well as other qualified profit-sharing and retirement plans are typically exempt from the reach of creditors.  Social security income is additionally not counted on the Chapter 7 Means Test, which determines whether or not a person will be eligible to file a Chapter 7 or if they will be required to file a Chapter 13.  Social security income is also not counted in the calculation of disposable income in a Chapter 13.  (For more about the Means Test and eligibility to file a Chapter 7, see our article here.)

Retirees can also usually avoid losing their home and their vehicles by utilizing exemptions.  For instance, the homestead exemption is intended to protect the equity of the Debtor’s primary residence in a bankruptcy. (Equity is the market value of real estate minus any mortgages or other liens on the property.)   In Illinois, a single Debtor can claim a homestead exemption of up to $15,000.00 in equity, while a husband and wife can claim a double-exemption in the amount of $30,000.00.   A widow can claim their deceased spouse’s homestead exemption, as can a Debtor with dependent children in the home whose spouse has deserted the family.   (For more information on how exemptions are treated with respect to houses and vehicles, please see our article here).  However, even if the equity in property exceeds the maximum amount that can be claimed, do not fret – the client is still eligible to file a Chapter 13, and would simply propose a plan to pay the amount over their claim of exemption to their creditors over a 3 to 5 year period.

Is a bankruptcy always required?  No.  Often low-income clients are judgment-proof.  If they simply refuse to pay the creditor, there is often little a creditor can do.  Yes, creditors can still take the retiree to court, and even get a judgment entered against them, but a judgment is only as good as the paper it is written on.  Since the creditor cannot go after retirement account assets or social security income, the retiree may have little else.  Thus, refusal to pay is another strategy.   But caution is to be emphasized here – creditors often still attempt to freeze bank accounts,.   While this can usually be undone, it requires the client to go into court and prove that source of the funds in the account were exempt, and often leaves them without use of said funds for a significant period of time while awaiting the court date .  Also, if the Debtor owns real estate, this is not a sound strategy, because once the creditor obtains a judgment, they can file the judgment with the County Recorder of Deeds and then that judgment becomes an encumbrance against the real estate, preventing it from being sold without the creditor being paid.   Also, there is much to be said for the peace of mind that comes from a bankruptcy filing, as some individual clients have told me that they came to the decision to file simply because they could not handle the stress of the constant creditor harassment.

No matter what path the client ultimately decides to pursue, it is imperative that they seek the help of an experienced debt counselor or attorney right from the start, so that they can understand all of their options and the ramifications of any decisions.   I have counseled prospective clients who, before they decided to contact my office, made the mistake of using retirement funds (funds that normally would have been exempt) to negotiate and “settle” out debts with their creditors.  These prospective clients were then surprised with a huge tax liability the following year due to the disbursement from the retirement account being taxable, an added 10% penalty for early withdrawal, and on top of all of that, each creditor that they “settled” with sent them a 1099-C for debt that they had written off in the settlement, which then became taxable income to the clients for that year.   And this increased tax liability was also non-dischargeable in bankruptcy, putting them in an even worse situation than they had been previously – with no retirement assets, and a huge non-dischargeable debt with no source of funds from which to pay it.   Do not make the mistake these clients did – speak with someone knowledgeable before you make any rash decisions with regard to your debt situation.  We are here to help, and do not charge for consultations.

www.manuelassociates.com  or Call Us : 217-344-3400

Am I Eligible to File a Chapter 7 Bankruptcy?

Means testFederal bankruptcy law changed on October 17, 2005, and made certain higher-income individuals ineligible to file a Chapter 7 bankruptcy, forcing them into a Chapter 13.  The income threshold is based on the median family income, by household size, for the geographic region in which you currently reside.

The following Table contains the income threshold amounts, based upon family size for the State of Illinois, as of the most recent update on November 1, 2014:

  FAMILY SIZE
STATE 1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *
Illinois $47,469 $61,443 $72,342 $83,546

* Add $8,100 for each individual in excess of 4.

These numbers change frequently (often several times per year), based upon new census data, so for the most up-to-date figures please be sure to check:  www.justice.gov/ust/eo/bapcpa/meanstesting.htm.

How is this calculation completed: Although the figures above are expressed as an annual amount, this is not how the calculation is actually done.  You cannot simply compare the amounts shown on your tax returns to determine if you are over or under the threshold figure.  The calculation is actually based upon the average of ALL of your (and your spouse’s and other household member’s) gross income over the six months prior to the filing of your bankruptcy case.  This includes nearly ALL income received during this 6-month time period, including but not limited to wages (including all bonuses/commissions/overtime, etc.), pension/retirement income, annuities, alimony or child support, unemployment compensation, business, farm or rental income, etc.  The only income that is not counted in this calculation are social security, SSDI, or SSI benefits, and LINK and welfare benefits.  Occasionally, we can disregard potions of income from a non-filing spouse or other household member, if all of their income is not considered available for household use (for example, if your non-filing spouse has student loan, installment loan, and vehicle debts that are not included in your bankruptcy, the payment of these debts that they will still be required to make can be deducted from their income).

I’m over the income threshold.  Now what?  First, be aware that the six month average calculation only takes into consideration the 6-months prior to the month you are currently in.  Therefore, if you file on January 31st, none of January’s income is considered – only July – December’s income is.  On the other hand, if you file on February 1st, the calculation would be based on August – January income.  Therefore, some Debtors who have recently experienced a decrease in income may benefit from waiting a month or two to file, as the months that are averaged together may show decreased income over time, making a Debtor who is ineligible to file this month due to income possibly eligible next month.  A good example of this is with seasonal employees, such as persons employed in the construction industry, as there is usually a lull in the winter months that may make them able to file then, and not eligible in the summer when they are receiving a lot of overtime.  However, the same scenario is equally applicable to someone who recently lost a job and went on unemployment, or obtained a much lower paying job, as any decrease in income would be averaged with the higher months to hopefully make you eligible to file a Chapter 7 eventually.

But my income is steady, and I am still over the income threshold.  What then?  Just because a Debtor is over the income threshold does not automatically mean that they are not eligible to file a Chapter 7.  This is simply a “threshold” inquiry, and if over these limits, simply requires a longer calculation to be completed by your bankruptcy attorney.  In certain situations, a Debtor’s gross income (as taken into account in the calculation) does not accurately reflect the amount of disposable income available to a them at the end of the month.  For example, if a Debtor pays out a significant portion of his income in child support, then even when they are over the income threshold, after the child support deduction is taken into consideration, they typically have no remaining disposable income that is available for payment to creditors.  Similarly, if Debtor’s have large payroll deductions for insurance or mandatory retirement (I find this especially true for municipal employees and teachers), then they may also be in the same boat.  Other situations may include Debtors who owe a significant amount of priority debt (tax debt or child support arrears), or have large house or vehicle payments, as the calculation attempts to determine whether there would be any income left over that could be used to pay your other unsecured creditors.  Lastly, there is a presumption that even if you have some income left over at the end of the month, if your unsecured debt is significantly high enough that you would be unable with the amount remaining to pay at least 25% of it back over a 60-month period, then it is not worth it to the Court to push you into a Chapter 13, and you will still be eligible to file a Chapter 7.  As you can see, there are a multitude of ways for a Debtor to still be eligible to file a Chapter 7, even if they are over the income threshold.  The only way to really know one way or the other, is for a Debtor to bring in his/her paystubs, and for our office to do the complete calculation.

What if after all this, I still make too much and am ineligible to file a Chapter 7?  If a Debtor is over on the income threshold and deemed ineligible for a Chapter 7 due to having excessive income available to them, the Debtor can still file a Chapter 13 bankruptcy.  In such instances, however, the Debtor’s Plan in a Chapter 13 is required to be a 5-year Plan, unless the Debtor can pay 100% of the debts owed in less than 5 years.  The calculation of 6-month’s average income will be used to determine how much income is left over and available for payment to unsecured creditors in your Chapter 13 Plan.  Depending on your income and the amount of debt, this could be a payment to your creditors of anywhere between 0 – 100% (some further deductions are allowed in the Chapter 13 calculation that are not allowed in the Chapter 7 Means test calculation, such as voluntary contributions to retirement accounts and  401(k) loan repayments, so these could decrease your disposable income amount even further).

Lastly, even though a Debtor may be eligible for a Chapter 7 based on income, certain individuals elect to file a Chapter 13 for other reasons. If a Debtor is behind on a secured debt that he wishes to keep, such as a house or a car, and he wants to keep these items of property, he will opt to cure the arrearages in a Chapter 13 Plan.  A Chapter 7 will not save property in which the Debtor is not current at the time of filing (or if they fall behind during the pendency of the bankruptcy).  Also, since a Chapter 7 case is a liquidation bankruptcy, if a Debtor has significant equity in property or other assets, in order to avoid having them seized and liquidated, they may desire to file a Chapter 13 – a Chapter in which Debtors are entitled to keep all of their property in exchange for entering into a repayment plan for the benefit of their creditors.   Thus, some Debtors may need to file a Chapter 13 regardless of whether or not their income meets or exceeds the Means Test threshold for a Chapter 7.

As always, our office is happy to meet with you with regard to your specific asset, income, and debt situation.  If you provide our office with complete income information, we can determine whether or not you are over the income threshold and can also complete the longer calculation if necessary, to determine your eligibility for either bankruptcy Chapter.  Call us at 217-344-3400 to set up an appointment today!

www.manuelassociates.com  or Call Us : 217-344-3400